WASHINGTON--(BUSINESS WIRE)--The National Council on Teacher Retirement (NCTR) issued the following statement in response to a January 10, 2010, Wall Street Journal article by Joel Klein entitled “Why Teacher Pensions Don’t Work”:
Former New York City schools chancellor Joel Klein has failed to do his homework. Teacher pensions DO work. Klein’s recent essay concerning them therefore deserves an “F.”
The difference between Bernie Madoff, who claimed he was getting 8 percent returns on his clients’ investments, and the nation’s public pension plans, is that Madoff was pretending to make his number, while public pension plans have actually been earning their assumed 8 percent return -- and then some.
In fact, for the 25 years ending 12/31/09 – a period that has included three economic recessions and four years when median public fund investment returns were actually negative – public pension funds’ median investment return was 9.25 percent, comfortably exceeding plans’ typical assumed investment return of 8 percent. Recent analysis has also shown that historical investment experience over 20-, 25- and 30-year time periods also exceed this assumed 8 percent number.1 Indeed, for the year ended 6/30/10, the median return for public pension funds was 12.8 percent.
That, Mr. Klein, is the difference between a Ponzi scheme and a good deal for taxpayers.
Mr. Klein also forgets that teacher pensions are pre-funded, which means that retirees’ benefits are paid from pension trust fund assets, and not on a pay-as-you-go basis from state and local governments’ general revenues. Furthermore, the value of these pension assets has rebounded sharply since their mid-2009 lows, and now totals over $2.73 trillion, their highest level in two years.2 Finally, the majority of these trust fund monies – 72 percent for the period from 1982 to 2008 -- are made up of employees’ contributions and investment earnings.3
Consequently, in 2008, the most recent year for which complete US Census Bureau figures are available, while government sponsors contributed $82 billion to pre-fund their pension plans for the future, the funds themselves paid out a total of $175 billion in benefits for today’s retirees4 – a $93 billion difference that states did not need to divert from their operating budgets thanks to these pre-funded pension plans. And of this $175 billion in benefits paid to retirees, approximately $126 billion came from their own paychecks, when these retirees were active workers, and from investment earnings on employee and employer contributions; only 28 percent was comprised of taxpayer dollars.
Therefore, Mr. Klein’s claim that public employee pensions are “massively” underfunded is simply hyperbole. The reality is that the value of public pension trust fund assets, from which state and local government pension benefits are paid, has rebounded sharply since their mid-2009 lows, and these gains are helping to offset the effects of the market decline on overall funding levels. Aggregate public pension funding is still at approximately 80 percent for FY 09,5 a level which the U.S. Government Accountability Office (GAO) says is acceptable for public plans based on its survey of expert opinion.
Mr. Klein would also have his readers believe that there is something inherently wrong in a pension system that helps retain teachers. He complains that in New York City, few teachers leave after 10 years, and that “quite a few of these senior teachers admit they're burned out, or would want to try something else, but they stay simply because they cannot afford to forego the pension.” What he fails to mention is that more than quite a few are also well-trained, valued teachers with years of classroom experience whose loss would be deeply felt by the education system as well as by students and their parents.
Ironically, at a presentation in Washington, DC, in 2010, Mr. Klein acknowledged the fact that he could not convince experienced, desirable teachers to leave the Montgomery County, Maryland, school system to come to New York City because of the potential loss of their Maryland pensions. Mr. Klein fails to realize that if the shoe were on the other foot, New York City taxpayers would be thankful that their pension system was serving to retain the best and the brightest in New York City when Montgomery County’s schools chief came poaching.
Teacher defined benefit pensions are smart, effective tools to help keep teacher recruitment and retention costs as low as possible, providing modest, dependable retirement security at about half the cost6 to taxpayers of other pension models. Just like the teachers they serve, these pension systems deserve respect -- not factually incorrect criticism -- for the important role they play in preserving and enhancing the quality of our nation’s education system.
Click to read the letter to the editors of the Wall Street Journal from Jim Mosman, Executive Director of NCTR.
1 Callan Investments Institute Research, “Investment Return Assumption for Public Funds: The Historical Record,” June 2010.
2 Federal Reserve System, “Flow of Funds Accounts of the United States, Third Quarter 2010”
3 US Bureau of the Census, “State and Local Government Employee Retirement Systems”
4 Ibid
5 National Association of State Retirement Administrators, “Public Fund Survey Summary of Findings for FY 2009”
6 National Institute on Retirement Security, “A Better Bang for the Buck: The Economic Efficiencies of Pensions;” 2008